Chapter 2 Thinking_like_an_economist.pptVIP

The Economist as a Policy Adviser Why economists’ advice is not always followed President Economic advisers: what policy is best Communication advisers: how best to explain it to the public Press advisers: how the news media will report Legislative affairs advisers: how Congress will view the proposal Political advisers: effect on the electorate Decision * Why Economists Disagree Economists may disagree about the validity of alternative positive theories about how the world works Economists may have different values and therefore different normative views about what government policy should aim to accomplish * Why Economists Disagree Differences in scientific judgments Different hunches about Validity of alternative theories Size of important parameters that measure how economic variables are related E.g.: Tax household’s income or consumption Different normative views about the tax system because of different positive views about the responsiveness of saving to tax incentives * Why Economists Disagree Differences in values Peter and Paula - take the same amount of water from the town well Peter’s income= $100,000 Tax= $10,000 (10%) Paula’s income= $20,000 Tax= $4,000 (20%) * Why Economists Disagree Perception vs. Reality Rent control - adversely affects availability and quality of housing Costly way of helping the neediest members of society Many cities use rent control Trade barriers – economist oppose it Import on certain goods - restricted * Summary Economists try to address their subjects with a scientist’s objectivity. They make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. Economics is divided into two subfields: Microeconomists study decisionmaking by households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. * Summary A positive statement is an